In this article, we evaluate two semiconductor stocks, Intel (INTC) and Broadcom (AVGO). In more detail, we have a bearish view on Intel and a neutral view on Broadcom.
Both companies are in the semiconductor business, but Intel focuses on data center, Internet of Things, PC and platform products. In contrast, Broadcom is known for its artificial intelligence chips, but also makes chips for enterprise, cloud and data centers. Also, Broadcom is a fabless company, so it doesn’t make its own chips, while Intel makes its own semiconductors.
In terms of stock price, Intel shares are down 62% year to date, putting its trailing 12-month return in the red at 50%, while Broadcom shares are up 34% year to date and have surged 75% over the past year.
With such a wide gap in stock performance, it’s not surprising that there is also a wide gap in valuations. We compare price-to-earnings (P/E) ratios to see how each company’s valuation compares to the broader industry valuation.
By comparison, the semiconductor industry’s price-to-earnings ratio (PER) is 51.3, compared with an average of 36.7 over the past three years.
Intel
Intel’s price-to-earnings ratio of 85.65x is trading at a fairly high level within the industry, despite the chipmaker’s growing problems. The company’s forward price-to-earnings ratio of 53.8x is much more promising, but there are too many question marks at this point to determine how accurate it is. Therefore, a bearish view on Intel stock seems appropriate at this time.
For example, the chipmaker is considering selling a large portion of its business as part of a larger restructuring, which Intel CEO Pat Gelsinger told Yahoo! Finance after the company’s earnings release is “Intel’s biggest restructuring since the memory microprocessor decision 40 years ago.”
As part of this strategy, Gelsinger is said to be considering an initial public offering of Altera, Intel’s chip manufacturing division, as well as a sale of the company’s foundry business.
Additionally, Intel is reportedly interested in selling at least a portion of its stake in Mobileye (MBLY), and Qualcomm (QCOM) may be interested in buying Intel’s design division, particularly its client PC design business.
Additionally, Intel’s potential selloff jeopardizes $19.5 billion in grants and loans the company was set to receive from the American Semiconductor Science Act. The money was meant to help Intel’s domestic semiconductor production, but recent cuts have raised doubts about whether the company will be able to secure some of this funding.
Ultimately, Intel will need time to streamline its operations, and at the end of that process, Intel may look very different than it does today. As a result, investors may be better off avoiding the stock, at least until there is light at the end of the tunnel.
What is your price target for INTC stock?
Intel has a consensus rating of Hold, based on 1 Buy, 26 Hold, 6 Sell, and 1 Buy ratings in the past three months. Intel’s $26.09 price target suggests an upside potential of 37.46%.
See more INTC analyst ratings
Broadcom
Broadcom isn’t cheap at 122.6 times earnings, but its forward price-to-earnings ratio of 23.8 suggests analysts expect the company’s earnings to explode. However, investors may have missed the latest bargain buy opportunity, and a neutral view may be in order in the near term.
A review of Broadcom’s latest quarterly financial results reveals that the company’s performance did not quite meet expectations, disappointing investors. Also, the company’s guidance showed that it expects sales of $14 billion for the current quarter, slightly below the expected $14.1 billion.
Following the release of the earnings report, Broadcom’s stock price fell 10%, creating an opportunity for investors to buy at the low end. However, the selloff was short-lived as the stock quickly began to rise. On Tuesday alone, the stock was already up 3% as of mid-morning.
Essentially, Broadcom stock is once again perfectly priced, signaling the possibility of another disappointment in the company’s next earnings report. As a result, investors should be patient and be able to buy Broadcom stock at a discount if there are signs of temporary weakness in the company or its stock price.
What is your price target for AVGO stock?
Broadcom has a strong buy consensus rating based on 23 buy, 3 hold, and 0 sell ratings in the past three months. Broadcom’s average price target is $198.66, suggesting an upside potential of 34.04%.
See more AVGO analyst ratings
Conclusion: Bearish on Intel, neutral on Broadcom
Views on Intel and Broadcom couldn’t be more different: Broadcom has a Neutral rating, but investors shouldn’t lose money buying the stock even at its current price, so long as they hold for the long term, especially given the company’s low forward P/E ratio.
Conversely, Intel’s future is too uncertain. If the company were to start creating shareholder value through spinoffs, divestitures, or divisions, I might become more positive on the stock. But the elimination of the dividend suggests it may be a while before we see any value creation.
Disclosure
